Market Thoughts: Summertime fun?

Just as summertime living looked easy the ‘bond gods’ again rumbled. At the risk of repetition, pay close attention to bond markets. Also, term structure. They’ve repeatedly proven the ultimate exuberance disruptor. Where bonds lead, risk assets follow. Always.

Why rumble? Unfortunately, it’s driven by a list that continues to grow. Inflationary worries persist as the Strait remains closed and warring parties dig in, ostensibly willing to escalate. To state the obvious, that ends badly for everyone.

I know there’s a lot of ‘happy talk’ that oil markets have managed well to date. They have. My problem is the implicit assumption they’ll continue to be OK. “What, me worry?” is a bad way to think about the market and macro tail risks that continue to swirl.

Should we see an escalation by Iran on energy facilities in the Gulf, or by the U.S. against Iran, markets could turn more riotous. What if escalation involves infrastructure bombing and American boots on the ground? Known unknowns. Possible, yes. Likely? I have no idea. Neither do you.

Focusing on geopolitics alone isn’t a way to manage money. If you’re only counting on the best (or worst) outcome, you’ve set yourself up to eventually fail. Markets are random walks. They pivot when you least expect it. Lite-liquidity summer days make a perfect backdrop for turbulence.

So how best to play the current environment? I’m not a golfer but have family members who are. The analogy they’d make? Play down the middle of the fairway. Keep it safe, don’t get cute. For the few times in younger days I golfed with them, I heard that phrase often. A life’s lesson learned. Applying it to investing… make sure you have offsetting risk positions. Embrace diversification.

Another hot topic’s resurfaced. The rising U.S. national debt load. It fades into the background, then quickly pops back up when bond yields spike higher. Long-term yields across developed countries have revisited multi-decade highs. That makes for quite a headline, and investors rightfully jumpy.

Foreign governments, including sovereign wealth funds, have taken note. There’s been a drum beat for several years now away from U.S. Government bonds. And the beat goes on.

What helped pause recent bond market rumbles? The U.S. Treasury said it’s “at least” doubling liquidity support operations at the long-end of the curve. Buying 10-30 year maturity bonds. The announcement was made to ameliorate anxiety.

The Treasury needs to self-finance buybacks. If the goal of intervention is to signal they’re keeping a close eye on long-term rates, fine. That serves to clip the wings of overzealous shorts, knowing if yields are pushed too high the Treasury’s likely to step in again.

Markets will look for release valves if the long-end of the bond curve is being managed. The first will be the dollar, which may find itself under pressure. It’s interesting to note the ‘coincidence’ of recent dollar weakness with a tick up in Bitcoin and gold. For markets, there’s no such thing as coincidence.

If funding for Treasury buybacks comes from short-term bills, the front end of the bond curve will be under pressure. If there is ‘good’ news in that observation, Treasury will effectively be doing the Fed’s job for it. Tightening monetary conditions. Mission accomplished? No.

It may have the countereffect of raising term premia. Rather than punters shorting long bonds, institutional holders may decide they want to step back from the ‘safe harbor’ of longer dated Treasury bonds. To state the obvious, intervention doesn’t address the central issue… fiscal profligacy.

Government spending increasingly goes to non-discretionary spending programs like Medicare and Social Security. That makes spending cuts painful to voters. It doesn’t make it impossible. As an old friend and colleague kidded me, if the U.S. was an emerging economy markets wouldn’t be acting as charitably.

The U.S. is the U.S., and the dollar is the global reserve currency. But their stars carry a bit less luster. They continue to wane. If hard spending decisions aren’t taken, the impact broadens. Both as it relates to interest rates and economic growth. Today it’s a slow bleed. That’s good and bad news.

I expect the bouts of volatility we’ve seen will continue. Until earnings forecasts eventually surprise to the downside, the bond market’s throttling up and down of risk appetite seems a given. With Treasury boosting buybacks, bond vigilantes appear for now stuck in a holding pattern.

‘Bond gods’ willing, enjoy what’s left of any summertime fun…

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 8/20/26

Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.